As a physician, you have enough matters totake up your time and thoughts withoutthrowing financial concerns into the equation.You can sleep better at night when you're confident that your hard-earned dollars, tax planning,and retirement are being managed by a professionalfinancial team. But what professionalsshould you rely on and how should youuse their help most efficiently?
GETTING TO KNOW YOU
First and foremost, building afinancial team to manage your assets isnot an exact science—in fact, itdepends very much on your individualgoals, lifestyle, and personality. It'smuch like building a home. You bringtogether a team comprised of an architect,landscape architect, constructionmanager, and interior designer. Youcan expect these professionals to beexact in their calculations and specific,down to the fractional inch, in all aspects ofdesign and construction. They have the skills andknow-how to design and construct a house.
But they can't build your dream home withoutfirst understanding you—your goals andyour lifestyle. Before beginning planning anddesign, your team needs to know how you andyour family live and entertain. Are you traditionalor contemporary in your tastes? What preferencesdo you have in styles and furnishings, andwhat are your dreams for your home?
Look at selecting a financial team in the sameway. Although the professionals you assemblehave all the qualifications, it's very importantthat you feel a connection with them. You mustbe able to easily communicate with them, andfeel confident that they will understand and takedirection from you. It is critical that you feelcomfortable sharing your objectives, fears, anddreams for your financial future.
SELECTING YOUR PLAYERS
To start building your team, make sure thatyou are considering professionals who haveproven credentials (eg, certified public accountants[CPAs], chartered financial analysts [CFAs],or chartered financial planners [CFPs]). BothCPA and CFA are designations that require a rigorousprocess of education and testing, plus regularcontinuing education. There are strict ethicsrequirements for these designations, not only onthe exams, but also in ongoing business practices.
You should have a CPA on your team who isknowledgeable about tax laws, accounting rulesand regulations, and other technical information.Most of us primarily use CPAs to fill out our taxreturns and answer questions that stem fromever-changing tax laws. You should think of thisperson as a member of your financial team.Remember, however, that even with a trustedCPA, there is a great level of subjectivity onaccounting decisions. There is no set formulawhether you should take gains or losses or completea transaction in one year versus another.This is where your personal objectives, style, andpreferences come into play. You have to communicatethese to your financial team.
Like any other profession, some CPAs specializein particular areas. If you have a complicatedtax problem, you probably should go to atax accountant or a tax lawyer whohas specific knowledge in that area.For example, if you hold foreign assetsor if you have a complicated truststructure, then you may want to havea specialist help you in addition toyour regular CPA.
DOING SOME DIGGING
When selecting an investment manageror a CFP, it's smart to do some initialresearch. Are there any conflicts ofinterest? Are they owned by a large firmor are they independent? Generally,you should look for an independentadvisor with as few conflicts of interestas possible. One good way to uncover valuableinformation is to review the advisor form thatevery investment manager must file with the SEC.This document shows the firm's ownership, itsinvestment philosophy, the individuals' educations,and other pertinent information. You canrequest a copy of this form from the firm.
One of the most important things you canknow about the individual or the firm is howthey are paid. If you know how someone is paid,you will know their motivation or any conflicts ofinterest they may have. Do you pay the firmdirectly, or does it receivecompensation from the typesof instruments put in yourportfolio, such as load mutualfunds? The best course is topay directly so you knowexactly what the compensationis and are assured that the firmhas no conflicts or hidden interestsin recommending thatyou buy or hold a certain investmentover another.
Also consider where theseassets' custody resides. It usedto be that people took possessionof their securities in theirown name, usually storingthem in a personal safe-depositbox. Today, this is impractical due to howthe industry has changed over the past 10 years.In registering securities under your own name,sometimes it is necessary to reregister thembefore they can be sold. One of the beauties ofmutual funds is they have daily liquidity and theassets are held in a trust at a bank where theinvestment manager of the mutual fund has nodirect control over them.
If you have individual stock holdings and abroker holds them, be sure to ask how they'rebeing held—are they in your name or a nomineename? It may be more prudent to consider abank custodial account where the bank merelyserves as a "live" safe-deposit box and the assetsremain in your name.
When you start to build an investment programor an investment portfolio, you need to lay out yourgoals and needs upfront. Don't just focus on thereturn aspect of the equation; also focus on therisks that are involved. A CFA or a CFP can assistyou in asset allocation, equity and bond selections,and recommendations for other investments.
But again, you must be the team leader anddirect these advisors on the degree of price volatility,income requirements, and amount of risk youare expecting. Beware of anyone who claims tohave the perfect answer—it does not exist.Physician-investors frequently are caught becausethey don't ask the right questions, don't askenough questions, and defer to the "experts" on allaspects of building an investment program.
Ultimately, you are the one to benefit or be hurtby any single program. With a busy schedule, youmay feel that you want to get this off your plate andhire someone who will tell you what to do. Think ofthe house-building analogy. You would never say,"Just build me a house. I really don't care whatkind of house it is, as long as it has a roof, door, andwindows." In building an investment program, youcan't delegate it in entirety to another; you mustcommit some of your time and energy.
UNDERSTANDING THE PROCESS
It's generally never a good idea to have taxes asthe primary mover in an investment decision, butyou should know if there arepotential tax consequences. Ofteninvestment advisors fail to tell youthe consequences of buying orselling at a particular time. Beforethe year's end, talk with your CPAand your investment advisorabout your tax situation, since taxconsequences fall into the subjectivearena. Especially if you are along-term investor, investmentdecisions should not be consideredpurely from a tax standpoint.
Another good rule of thumb isthat, if you can't understand aninvestment, you probably shouldnot hold it. Don't buy the argumentthat you don't need to knowall of the intricacies of a complicated investmentbecause its return is so attractive. This is a bad trapthat many physician-investors have fallen into.Practicality should prevail; if something looks toogood to be true, it probably is.
In summary, a team of financial professionalscan be most valuable as advisors, providing expertisethat can be beneficial to help you achieve yourfinancial goals. Spending the time upfront toresearch this team, seek referrals from others, andensure that you have good communication andchemistry will pay off in the long run. Your objectiveshould be to ensure that the team is alwaysworking toward your best interest.
Asha Joshi is a managing principal of Payden & Rygel, one of the
largest independent investment advisors in the United States. She welcomes
questions or comments at 213-830-4247 or firstname.lastname@example.org